Over the course of the next decade, it’s likely that we will see a demographic tidal wave of business owners who are looking to transition from running their businesses to retirement. For owners who are ready to sell a business, it’s vital to work with a team of professionals who will oversee the (often) lengthy process and guarantee financial short-term needs and long-term retirement goals.
In order to pass the torch– without getting burned — we recommend that owners consider the following key tenets of successful transitions.
Give yourself plenty of time. We typically suggest starting the process about two years before you think you will want to sell or transfer the business. Within that time frame, you will be able to determine the proper valuation for the business, assess the company’s strengths and weaknesses, address any risks that need to be remedied (such as potential staffing issues, debt restructuring, recordkeeping, earnings outlook, etc.) and work to position the company as needed to maximize its value. Selling a business is comparable to selling a house — many homeowners will proactively fix any issues to make the home more appealing, seeking to increase its price potential. Allow yourself enough time, and remember to keep your ultimate intentions strictly confidential.
Work with a trustworthy team. There are a number of professionals you will likely need to work with during this process, including an accountant, a financial advisor and a business transfer specialist. Make sure that team members are experienced, knowledgeable, accessible (you may need to meet regularly) and dedicated to your needs. Given that the selling of the company reflects a lifetime worth of work, make certain you are getting good, trustworthy advice.
Choose a successor. If you choose to sell or transfer the business to a family member, your ultimate goal will likely differ that of an outright sale. In this case, continuity and a concern for the continued success of the business may be as important, if not more so, than seeking the highest potential value. If the transition involves a multi-year payout, ensuring the ongoing success of the enterprise becomes even more important. However, even if you plan to sell outright and are solely concerned to seek the highest potential sales price, it is important to keep in mind that the buyer must see it is as a fair price. An unreasonable price, even if agreed to by the buyer, can result in litigation. The time and cost of litigation can quickly erode the value of those additional proceeds. It will be especially important to rely on your business transfer specialist to avoid this pitfall.
Think long-term. After the business has been sold, owners face a different challenge: what to do with the proceeds. Of course, this will depend on what you want to do with your time after the sale. Will you travel, take on a new business venture, develop hobbies, become involved with charities? Do you have anticipated projects or long-deferred endeavors that you would like to pursue?
Once you have some idea of what you want to do, it will be vital to work with an experienced financial advisor who can help you to structure the proceeds from the sale in order to help you realize your retirement goals. To accomplish this, it is essential to develop a carefully designed plan. This plan will look at your entire financial picture – including non-portfolio sources of income, anticipated expenses, any other holdings you may have, short-term needs, long-term goals, and the risks – in order to develop a comprehensive and disciplined investment strategy that can help you to make the most of your assets.
While there are many factors that go into selling a business, if a plan is carefully laid out with a solid time frame in mind, the transition from one owner to the next can be much easier.
Check back to Ramparts, as we will touch on other succession planning tips soon.